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Stock Analysis: YUM! Brands, Inc. (YUM)

YUM! Brands, Inc. (YUM), together with its subsidiaries, operates quick service restaurants in the United States and internationally. Dividend stock has paid dividends since 2004, and has increased dividends for 8 years in a row.

The company’s last dividend increase was in September 2012 when the Board of Directors approved a 17.50% increase in the quarterly distribution to 33.50 cents /share. The company’s peer group includes McDonald’s (MCD), Burger King (BKW) and Domino’s Pizza (DPZ).
Over the past decade the shares of this dividend growth stock have delivered an annualized total return of 21.10% to its shareholders.

The company has managed to deliver a 12.60% average increase in annual EPS since 2002. Analysts expect YUM! Brands to earn $3.27 per share in 2012 and $3.67 per share in 2013. In comparison, the company earned $2.74/share in 2011. Over the next five years, analysts expect EPS to rise by 14.27%/annum.
The number of units has declined from 18,500 in 2007 to 18,000 by 2011. The company generates a very high return on equity, which never fell below 50%. I generally want to see at least a stable return on equity over time.
Ever since Yum! Brands started paying dividends in 2004, it has managed to increase them at a fast clip. The quarterly dividend has increased from 5 cents/share in 2004 to 33.50 cents/share by 2012. Over the past five years, dividends have growth by 17.80%/annum, which is faster than earnings growth.
The dividend payout ratio increased from 0% in 2002 to 40% in 2012. This is a direct result of Yum!’s initiation of a dividend policy, and raising distributions at a faster rate than earnings. Future dividend growth would likely be closer to the growth rate in earnings per share. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently YUM! Brands is trading at 19.80 times earnings, yields 2% and has a sustainable distribution. The stock is a little richly valued for my taste, and I would probably try to buy some on dips below $54/share in my Etrade Share Trading account. Of course, if the stock price is flat in 2013, but dividends increase to 40 cents/share, my entry price would increase to $64 /share. It is important to remain disciplined, and only invest in the best companies at the best prices.

 Full Disclosure: Long YUM

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